I use to be in debt by over $100,000 which was mostly due to student loans (undergrad and graduate school). Back when I had that much debt, it was daunting and depressing. I was 22, owed $100,000 and only made about half that amount in salary. I knew I not only wasn’t going to have any money for the next 5+ years, but I also knew I was extremely limited. I wouldn’t be able to take advantage of any great opportunities that may arise. This burden even caused me to talk to my doctor about the mental toll it was taking on me. Fast forward 6 years and I’m debt free. All of my financial stress is gone. And I feel a sense of security and opportunity that I’ve never felt before. This is why I believe successfully completing Step 7, Strive to be Debt-Free, may have the largest impact on your health and happiness.
Although, this step may have the largest impact on your health and happiness, it still makes the most financial sense to complete the first 6 steps shown below before going debt free. Many of the items before this step will provide you with a greater opportunity to accumulate wealth and set yourself up for a better future.
- Step 1: Building a Proper Emergency Fund
- Step 2: Get Your Employer Match (401k)
- Step 3: Pay Off High Interest Rate Debt Fast
- Step 4: Max Out Your Roth IRA
- Step 5: Max Out Your HSA
- Step 6: Max Out Your 401k
How to Pay Off Debt Faster
In my post Step 3: Pay Off High Interest Rate Debt Fast I talked about creating an ordered list of debts owed, developing a plan to pay them off, and how much money you could save. All of these same strategies and methods apply for this step. So, all you have to do is rinse and repeat the process with any left over debts you have. This may include credit card debt, student loans, car loans, medical bills, and various other charges. With all of this information listed in Step 3, this post will focus on other things you can do to pay down the rest of your debt even faster.
One of the easiest and most obvious options is to spend less. If you spend less money, you’ll have more money available to pay down your debt faster. Here are some ideas and areas to focus on when attempting to spend less:
- Housing – This is the largest expense by far for most people. Are you paying extra for private parking, a balcony, an extra bedroom or bathroom, a ritzy location, or luxury amenities? It’s key to analyze everything that you’re paying for with housing to determine what you need to be happy and what you get sold on for various other unimportant reasons. Also, can you live with a roommate? Can you move in with your parents for a few years? These options do have some limitations and negative connotations, but they could save you thousands of dollars a year. It’s important to seriously consider these options as they can really help you out financially.
- Transportation – This is the second largest expense for most people. While transportation is needed to get you to and from work, the supermarket and various other places, cars are getting more and more expensive. People are also more and more interested in luxury cars with added features. And, a car is one of your largest expenses that depreciates quickly over time. Instead of purchasing a new car with all the bells and whistles, look to buy a three year old used car off of a lease. Once you have your car, use it as long as possible. Don’t get caught up in replacing your car every few years or leasing. And, if you live in a city, are you able to live without a car by using Uber, Lyft, public transportation or biking? These options could save you thousands of dollars a year too.
- Food – This is the third largest expense for most people. And while everyone needs food to live, there are a few ways to cut down on your food expenses. The biggest one is deciding to eat in or cook rather than ordering out. While this takes more planning, your food costs can be cut in half. You can also look to get your ingredients from a local farmer’s market or Aldi’s to save some money. You can even use couponing to cut costs even more. While I look to cut my costs using these methods, I never sacrifice on quality for health reasons. I still stick with organic, non-GMO ingredients because future health problems will likely be way worse than your food cost savings today.
- Hobbies – Depending on your hobbies, they can become very expensive. Golf can cost someone around $10,000 a year. Hunting, world traveling, and horse back riding can cost thousands too. It’s easy to find other hobbies that you can enjoy just as much, but while also saving tons of money. My favorite hobbies include working out at home, running, or having family game nights which are all super low cost. It’s possible to find hobbies that are just as fun free as those that cost thousands.
- Services – Subscriptions and monthly services can add up quickly too. Between Netflix, Amazon, HBO, telephone line, cable TV, gym membership, and various software subscriptions, the average person spends around $2,848 per year. And, most of these services you can live without while still being just as happy and healthy.
- Pets – Most people don’t fully consider the costs of pets. Everyone thinks of the food costs but what about insurance, vet bills, medications, treats, collars, toys, and training? A new pet can cost you more than $2,000 the first year and almost $1,000 every year after depending on your habits. Now, say you have multiple pets, and this figure can add up quickly. So, before you go buy a pet, consider the financial consequences and run the numbers.
You can only cut your spending so much because many things like housing, transportation, and food are needed to survive. The good thing is, there isn’t any real limit on how much money you can make. Therefore, making more money will always be a viable option to help you get out of debt faster. Here are some ideas and areas to focus on when attempting to make more:
- Ask for a Raise – This is the quickest and safest option. You most likely already have a job, and if you’ve been one of the highest performers in your area, you probably deserve a raise anyways. Put together a good case why you’re worth the extra money and present it to your supervisor. There’s rarely any harm even if the answer is no.
- Work a Second Job – My sister works a full-time 9-5 job at a bank with decent pay. But she’s been in over her head with student loans too so she’s worked not only a second, but a third job for the past 5+ years. She works a couple days a week at a rehab center and picks up shifts at a retailer as well. These two extra jobs have helped raise her income and accelerate her debt payment plan.
- Start a Side Hustle – A side hustle is another interesting option. Whether it’s flipping Ebay or Craigslist items, freelancing, renting your spare bedroom, investing in real estate, or teaching, there’s tons of ways side hustles can earn you some extra cash. And, if you’re lucky, then one day your side hustle could end up growing into your main hustle.
Lower Interest Rates
Another option may be to lower your interest rates. The higher the interest rate, the longer it will take you to pay off the debt. Just as compound interest can be amazing for investing, compound interest can be just as devastating for debt repayment.
- Balance Transfer – Consider transferring your balance from one account to another. For example, say you have a credit card with an interest rate of 5%. It’s likely that there’s another credit card you could open up with a 0% interest rate for a temporary period of time (sometimes up to 18 months interest free). Run the numbers and see how much you could save by transferring your balance to another account to help pay it off quicker.
- Negotiate Interest Rates – A lot of times, as with the example above, companies know you may perform a balance transfer to save money. If those companies know that you’re considering that option, they may be willing to lower your interest rate for a certain period of time if you stay with them to pay off the debt. So, contact the companies to which you owe debt and tell them you’re considering a balance transfer if that company isn’t going to lower their interest rate. It may not always work, but it’s definitely worth the ten minute call for hundreds of dollars in potential savings.
With Step 7, Strive to be Debt-Free, the only debt that’s not included is a mortgage with an interest rate less than or equal to 4.5%. Paying off your mortgage will be covered in the final step, in an upcoming post. Since a mortgage can be an appreciating asset, with a low interest rate, it’s possible that using your money for other investments will be a lot more productive.
If you’ve been following my investing steps to financial freedom then this is the step where you become debt-free (excluding a mortgage). This is the step where you no longer have to worry about debts and interest rates. This is the step where you can alleviate your financial stress, obtain financial security, and set yourself up for all new opportunities in life. I can tell you from experience that becoming debt-free was one of my biggest financial accomplishments. An accomplishment that has made me happier and healthier. So I challenge you to step up and strive for a debt-free life.
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